Beware of easy economic answers

Shock a market and prices will react swiftly and dramatically to account for the sudden change in supply or demand. That's what markets are supposed to do, says Derrell Peel, Oklahoma State University Extension livestock marketing specialist. He explains this was one short-term impact that came with closing the Canadian border and unexpectedly removing that import supply from the U.S. market. When

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Shock a market and prices will react swiftly and dramatically to account for the sudden change in supply or demand.

That's what markets are supposed to do,” says Derrell Peel, Oklahoma State University Extension livestock marketing specialist. He explains this was one short-term impact that came with closing the Canadian border and unexpectedly removing that import supply from the U.S. market.

“When a market reacts to a supply shock, the prices sort it out. That's particularly true in agriculture where there aren't inventories to draw on in making supply adjustments,” Peel says.

Instead, in the case of the Canadian situation, price increases in order to adjust the quantity demanded to match supply.

Obviously, that's only one part of the confluence of supply and demand fundamentals that set the stage for the historic run in cattle prices U.S. producers have enjoyed this fall. But it's a point that deserves consideration as discussion about re-opening the border picks up steam.

Better Open Or Closed?

In October, USDA issued a proposed rule to amend its bovine spongiform encephalopathy (BSE) regulations. The proposal would create a new category for low-BSE risk countries. These are countries in which BSE has been diagnosed but they have undertaken specific preventive measures that supposedly mean cattle pose minimal risk of introducing BSE to the U.S.

In effect, passage of this amendment would enable Canada to export live fed cattle under 30 months of age to the U.S. for immediate slaughter, as well as feeder calves and cattle that would be harvested prior to 30 months of age.

Given the 60-day comment period for the proposed amendment, it appears the earliest cattle could start moving from Canada to the U.S. would be late winter or early spring.

In the meantime, USDA's Animal Health and Plant Inspection Service (APHIS) took a stab at predicting the economic impact of re-opening the border to live Canadian cattle (www.aphis.usda.gov/lpa/issues/bse/bse.html).

Bottom line, the USDA study estimates that reestablished slaughter cattle imports from Canada would result in a price decline of $1.30/cwt. Similarly, the study estimates that reestablished feeder cattle imports from Canada totaling 504,500 head would result in a price decline of 72¢/cwt. These figures reflect import levels prior to the border closing. The report anticipates the estimated price impact for the first year after opening the border as markets normalize.

Balancing Supply And Demand

On the surface, those with a protectionist streak can leaf through the report and, assuming the estimated price declines are in the ballpark of reality, claim: “I told you so!” on closing the border and eliminating competition.

Such a myopic conclusion, however, begs closer examination. For one thing, boxed beef trade from Canada has already resumed. While prices in that market have trended down, they're still significantly higher than a year ago.

Secondly, Peel says the short-term solutions adopted by some retailers to counter the increased cost of beef aren't necessarily positive for demand in the long run. Whether it's switching to more Select product, eliminating some cuts from the menu or cutting steaks thinner, such measures ultimately will also impact price via demand.

In other words, the price advantage gained due to the sudden closure of the Canadian border will likely soften whether or not it opens again.

“We still have a tendency to focus on trade in terms of total pounds of imports and exports, but it's important to remember that beef represents a complex set of products,” Peel says.

Thus, he explains, trade has as much to do with the balance or mix of the products needed in different markets as the tonnage itself. “The short-run impact of closing the border was related to pounds of product and keeping the pipeline full,” Peel says. “Longer term, this question of product mix becomes more important.”

Plus, Peel points out, “Canada doesn't go away just because you decide to build a fence.” In the bigger picture of agricultural markets, if the border were to remain closed there would be longer-term impacts on product mix and related beef demand here. Never mind the fact that as an agricultural nation with more production capacity than consumption, Canada would undoubtedly grow other products for export to the U.S., which would ultimately affect all U.S. producers.

“If you push in one side of a balloon it only makes the other side bulge,” Peel says. “When you try to make complex issues black and white you run the danger of creating simple, easy-to-understand, wrong answers.

“If everyone is protecting their own turf, pretty soon you're fighting for a larger piece of a smaller pie. If you want a bigger piece of a larger pie, you have to be willing to accept the competitive nature of the global marketplace,” Peel says.